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Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.

... in which Brad DeLong is somewhat polemic and seems to underestimate Martin Feldstein's track record and the influence of his analysis. Holders of 10-year treasuries who heeded Feldstein's advice on March 30, 2013 were a lot better off after Bernanke announced tapering less than 2 months later (http://www.project-syndicate.org/commentary/higher-interest-rates-and-financial-stability-by-martin-feldstein). Likewise, Feldstein pretty much nailed when the actual tapering would begin (http://www.project-syndicate.org/commentary/why-the-fed-postponed-the-qe-taper-by-martin-feldstein). Whether or not you agree with all of Feldstein's views, I have almost always found that it pays to listen carefully, when he speaks or writes.

If inflation were to exceed 2%, that would be fine with the "doves" on the Fed who have openly espoused such a policy. Of course, once core inflation begins to exceed 2% on a consistent basis, it will take the next recession or two to beat it back down. Inflation rates in the first part of the 1960s were also very low, but we all know how that ended.

My 2 cents on the bubble problem we are supposed to be facing nowadays due to the monetary expansion.

First to try to explain my logic, and how it explains what evidence is showing. In a scenario where there is a strong preference for liquidity, or the opposite very high risk premiums, what we would observe is the increase of savings and demand for risk free assets, low interest rates for risk free assets and even negative yields. These are the traditional liquidity trap conditions.

On this scenario, there would be a reduced liquidity for risky investments, and the violation of the efficient markets axiom. This scenario would also be characterized by an anemic supply of risky investments and a low demand for them.

We could think of conditions where supply would be higher than demand, and risk premium would be at discount, leading to the decrease on price of risky investments and an anti-bubble (something like a Milken curve, were reposition value of assets would be higher than its market price) .

The opposite a scenario is where be demand for risky investments would be higher than supply, and we could have a bubble. The low liquidity would be cause be the general aversion to risky investments, so only a little part of the portfolios would be invested in risky assets, triggering not only the lack of demand, but also the lack of supply (risky entrepreneurs wouldn’t have the funds to launch their projects).

Fundamental to the existence or not of a general bubble system is the way funds are flowing and investments made. If we are or not in liquidity trap conditions.

If we were experiencing a bubble, without general risk aversion, and abnormal demand for risky investments, than by nature money would be flowing to risky investments, supply for risky investments would also be increasing, since there is no lack of savings in the economy, interest rates would be increasing, output would be growing, etc.. etc..

Now we could be ignoring or negating that in fact we are in a liquidity trap. We could pencil this one to a Keynesian exuberance and claiming for the impossibility of the occurrence of his conditions, but what then would explain the conditions we are in?

Excessive monetary expansion? Well that would trigger inflation and an increase on interest rates wouldn’t it?
Lack of structural adjustments, the IMHO ignoble wage market stickiness that would be preventing us from lowering prices and expanding output. Well, we would be experiencing a shift of investments to markets where labor is efficient, we would be either witnessing the workers with lower wages being picked on the markets and the more productive skills being hired with a premium… We wouldn’t be seeing the levels of youth unemployment, unless your argument is that youths are overqualified…

If wage levels and work flexibility are the problems, Detroit should be now a paradise for new investments, they would be booming with firms and activity taking advantage of lower wages and people accepting work without any guarantees. Unless you think there is a gene mutation in the Detroit area that makes them love poverty and unemployment…

See also:

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